In a World Drowning in Debt the US Stands Out
In a world drowning in debt, the US stands out, according to the International Monetary Fund.
Global debt has reached record levels. According to a recent IMF report, the world has amassed $164 trillion of debt. That comes to 225% of global debt to GDP, levels not seen since the peak of the 2008 financial crisis when combined public and private sector global debt-to-GDP hit 213%.
Three countries account for half of the total global debt – the US, China and Japan.
China is a huge player in global borrowing. The country’s debt surged from $1.7 trillion in 2001 to $25.5 trillion in 2016. The IMF described China as a “driving force” behind the increase in global debts, accounting for three-quarters of the rise in private sector debt in the past decade. Last year, Jim Rickards listed a Chinese debt crisis as one of the possible snowflakes that could set off the next financial avalanche. The mainstream also picked up the theme, with analysts warning exploding Chinese debt could threaten the world financial system.
But according to IMF director Vitor Gaspor, the “United States stands out” in this world of debt. It is the only advanced economy projecting a rise in debt-to-GDP ratio over the next five years.
“We urge policymakers to avoid pro-cyclical policy actions that provide unnecessary stimulus when economic activity is already pacing up,” Gaspar said; or as ZeroHedge translated, “Trump, stop what you are doing before you lead to a debt funding crisis, that finally bursts the global debt bubble. ”
This dovetails with a report from five “A-list economists” who agreed in a recent op-ed that the US is going broke.
The IMF singled out the Trump tax cuts and the massive budget recently passed by Congress, noting they left the US with a deficit of 5% of national income into the medium term and a persistently rising level of debt in GDP.
“In the United States fiscal policy should be recalibrated to ensure that the government debt-to-GDP ratio declines over the medium term. This should be achieved by mobilizing higher revenues and gradually curbing public spending dynamics, while shifting its composition toward much-needed infrastructure investment.”
Notice the IMF primarily focuses on the evils of tax cuts. And while it does mention a need for reductions in spending, it’s perfectly happy with “infrastructure” spending. This is typical Keynesianism. In fact, runaway spending remains the fundamental problem after Americans got tax relief without any corresponding government relief.
The IMF also noted the problem of massive debt in a rising interest rate environment. According to its report, the interest burden has doubled in the past ten years to close to 20% of taxes, an escalating cost which “reflects in part the increasing reliance on nonconcessional debt, as countries have gained access to international financial markets and expanded domestic debt issuance to nonresidents.”
The IMF warned the world urgently needs to reduce global debt in both the private and public sectors to improve the resilience of the global economy. “Fiscal stimulus to support demand is no longer the priority.”
ZeroHedge summed things up pretty well.
What we again find odd is how quiet everyone was for the past ten years when central banks, by keeping interest rates at record low levels, enabled the world’s biggest debt issuance spree, for both public and private debt, and now that debt is at a level that even Goldman recently said is no longer sustainable, suddenly everyone – from central banks, to bank CEOs, to NGOs – is screaming from the rooftops how dangerous debt really is …
Reading the IMF report between the lines, it is nothing more than advance scapegoating for the inevitable global debt crisis that is coming, and which not even the IMF is hiding any more. What is most comical – if completely expected – is that the IMF is now blaming it all on Trump: not on generations of economists who steered the world to the point where there is more than $3 of debt for every $1 of GDP, and not on central bankers who flooded the world with debt so that the richest 0.01% can be richer than their wildest dream. Nope: it’s all Trump’s fault.
Somehow we doubt this advance damage control will work after the next, and likely final, crash.
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